The COVID-19 pandemic reaffirmed the essential role accountants and tax professionals play as trusted advisors for business. As we make our way through the recovery, one area where firms can further demonstrate their value is by guiding their clients through sales and use tax compliance, an area of increasing focus for cash-strapped cities and state governments.
SUT compliance has been an area of growing complexity and risk for businesses over the past decade, particularly since the Supreme Court’s 2018 Wayfair decision, which required e-commerce and mail-order companies to collect and remit sales taxes on revenue or transactions over a certain threshold. Those trends have only accelerated with the pandemic, due to the shift in consumer behavior.
For firms expanding their service offerings to include SUT services, here’s some factors to consider:
- Sales and payroll taxes are an emerging tug-of-war among states. The rise of remote work has altered how some states view what once were full-time commuters to neighboring metropolises. That has implications for how sales taxes are calculated and payroll taxes are assessed. New Hampshire, for example, is challenging the constitutionality of Massachusetts subjecting nonresidents who now work remotely full-time in New Hampshire to Massachusetts’ income tax. New Hampshire has asked the Supreme Court to review the case, and the outcome could have far-reaching implications.
- E-commerce is becoming a juggernaut. Retail online sales have grown steadily over the past decade and were a lifeline during pandemic-related lockdowns. Online transactions represented 14 percent of all U.S. retail sales in the fourth quarter of 2020, up from 11.3 percent the previous year, according to Department of Commerce statistics. During the height of stay-of-home restrictions in the second quarter last year, that number was north of 16 percent — and it’s clear to most observers that customers aren’t going back to the previous glide path of e-commerce adoption. A new inflection point has been set.
- States and localities are desperate for revenue. The recently enacted $1.9 trillion American Rescue Plan provides $350 billion in aid for states and localities, but most tax jurisdictions remain under great pressure. Most states predict revenue declines in FY2021 compared to pre-pandemic projections, and the list of proposed new or increased taxes to plug the gap are daunting. As the National Association of State Budget Officers noted in its roundup of state-of-the-state addresses last month, those proposals include: “increasing sales taxes, expanding the sales tax base, greater taxation of online sales, property tax relief, changes to meals and rooms taxes (and) closing business tax loopholes.” Other ideas include legalizing and taxing marijuana, expanded sports betting and increased tax rates on cigarettes, the group said.
- Audit risks are rising. Beyond new or increased taxes, audit and enforcement activity by tax jurisdictions is expected to increase this year. As tax compliance solutions provider Vertex points out in its recent report,
Be Prepared: 2020 Sales Tax State Research Signals More and Varied Changes to Come , three states — Washington, Louisiana and Nevada — are particularly reliant on sales tax for revenue and “may be the most likely to increase indirect tax audits.” Your clients can benefit from that kind of intel.
What does this all add up to for the accounting profession? Expanded opportunities, an uptick in client demand for outsourced SUT work, the ability to specialize and differentiate your firm services, and — most important — more tools to help clients navigate the unknown with timely advice on how to mitigate exposure and risk.
In many ways, 2020 was a year of triage for accountants and tax professionals and their business clients. As we move toward recovery, the focus is shifting toward steps to improve the long-term health of clients. It should be clear that SUT compliance check-ups belong on that list of assessments.
